A Look Into European Insurer Portfolios

European insurers can stand up and be proud of their portfolios. According to a survey of asset management practices of European insurers and money management firms, the European insurance marketplace has experienced strong growth, outpacing inflation over the last five years with a compound annual growth rate of 6.25%. Life insurers’ investment portfolios predominate the European insurance market due to the financial planning and wealth management orientation of life insurance (e.g. permanent life, annuities, insured pensions).

“IFI European Insurance Asset Manager Annual Survey” was designed by Insurance Finance & Investment, published by WorldTrade Executive Inc., in partnership with Patpatia Associates to be a tool for insurance companies when selecting a third-party manager. It found that insurers have become leading asset gatherers in the European marketplace, accounting for more than 27% of all assets under management and 41% of all institutional client assets. Understanding the market implications of the increasingly sophisticated investment activities of insurers is critical for both insurance companies and other wealth managers to remain competitive.

However, European insurers may take more risks, as they hold significantly greater equity exposures compared to their North American counterparts. Nearly a third of European portfolios are in shares, while U.S. life insurers typically invest less than 5% of their general accounts in public equities. Even non-life purveyors, with fewer asset liability management constraints, invest on average approximately 15% in stocks, the study notes.

European insurers are expected to make more consistent investments due to existing regulations and expected regulatory changes. In particular, the drive to adopt economic capital adequacy and risk models, through the planned rollout of Solvency II, as well as parallel moves by the insurance ratings agencies, such as Standard & Poor’s, will impact portfolio allocations, specifically lowering equity exposures and increasing diversification within insurers’ core bond portfolios, according to Insurance Finance & Investment.

The survey provides lessons for insurers:

• Sustainable profitability demands diversification of assets and investment approaches (i.e. book income buy and hold vs. active total return vs. value bond strategies)

• Even larger insurers can receive significant benefits from outsourcing portions of their general accounts—from entry into new asset classes to accessing growth markets, such as pension buyouts

• Firms with guaranteed variable annuity offerings have a competitive advantage in gathering and retaining clients in the face of continuing market volatility